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The Alt-A Meltdown and Why You Care
August 3, 2007 | Leave a Comment
In a huge sell-off last Friday, Wall Street reacted to a mortgage industry crisis not seen in decades. American Home Mortgage, the biggest Alt-A (alternative documentation like stated income) lender halted all lending activity and filed bankruptcy. They laid off 7,000 employees and left 3,200 borrowers in the lurch at closing tables all across the nation. “Sorry maam, your loan is not going to close after all since your lender just went bankrupt a few minutes ago.”
Within minutes, almost every lender made swift and drastic changes to their Alt-A programs ranging from total elimination to rate increases of 4 points. Two of Bear Sterns hedge funds that invest in Alt-A loans went bankrupt, their co-president resigned and as one analyst put it, “there is NO liquidity in the secondary market for any loan that is less than fully documented.”
American Home Mortgage joins more than 50 lenders in bankruptcy this year. It is bigger than most of the other lenders to go out of business so far, second only to New Century.
But unlike New Century and most other bankrupt lenders, American Home Mortgage was not a “subprime” lender. Almost none of American Home Mortgage’s $58.9 billion in home loans last year were to subprime borrowers. They were all to stated income and no income verification borrowers with GOOD credit. Borrowers just like you.
Readers of my book, Mortgage Secrets for Real Investors, know that investor loans are outside of agency guidelines and are sold off in pools to buyers in the secondary market like Bear Stearns. Now lenders have billions of dollars of Alt-A loans to sell and literally no buyers.
Why is this a problem for investors? Well, let’s see… If you are self-employed and you have to qualify with tax returns for mortgages, how many loans will you be able to qualify for? If you are required to put down a minimum of 10% or worse, 20% on every mortgage, how many mortgages can you afford? If you were used to getting rates between 6.5% -7.5% and are now paying between 8% -10% on conventional loans (not hard money), how many of your investment properties will cash flow? If you are flipping properties, how much longer will you have to wait for a buyer if they cannot fully document their income and/or come up with a down payment?
In the last 10 years or so the credit has been free-flowing and the guidelines have been loose. Investors have enjoyed these relaxed guidelines for a long time and now it all may end. The credit crunch is here! How long it will last is anyone’s guess. But now more than EVER, you must educate yourself about investor finance. Pay attention to the markets and be aware of how your business will be impacted. And then make the necessary adjustments. And make sure you have a knowledgeable broker on your team. You need one now more than ever. I will keep you posted as the situation develops in the coming weeks. Fasten your seat belt and hang on tight. This is going to be a wild ride!
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